Ethiopia Economic and Trade Report 2015

Posted in Consultation

Labelled as one the "African lion" economy, Ethiopia has recently been getting much attention from international investors and observers, appealed by its impressive decade growth, its stability and its large domestic market. In this context, was fiscal year (FY) 2014/2015 a good year for Ethiopia? And more importantly, is Ethiopia on the track to reach its main goal, to become a lower middle-income country by 2025?
The year 2015 witnessed important downturns which affected the economies of the Sub-Saharan Africa (SSA). Overall growth in the region is projected at 3.75% in 2015, down from 5% in 2014, on account of less favourable conditions on commodity markets and more stringent global financial conditions.

In this context, Ethiopia is one of the few countries in the region where the combined recent trends did not have as much of a negative impact. Growth seemed to be holding up notably due to (i) continue investment in infrastructure, engaged under better financial market conditions; (ii) relatively strong private consumption; and (iii) historically low oil prices coupled with less unfavourable market price movements for its main commodities.
The GoE approved in December 2015 its second Growth and Transformation Plan (GTP II) which covers the 2015/2016 – 2019/2020 period. The main features of GTP II are articulated around the primary objective for Ethiopia to become a lower middle income country by 2025. This objective entails an annual average real GDP growth rate of 11% (with 8%, 20% and 10% growth for the agriculture, industry and services sectors respectively) with a high priority given to the export sector through (i) diversification; (ii) increased supply of high value crops, horticulture and manufactured goods; (iii) a stable exchange rate; and (iv) stronger banking and finance institutions.
GDP Growth
The Ethiopian economy pursued its decade old growth pattern with a real GDP growth of 10.2% registered in FY 2014/15 (compared with 11.2% projected in GTP I) still largely above the SSA region's 4.4% average for that period.

The share of each sector in GDP continued to confirm the shift from agriculture (38.8%), towards industry (15.2%) while the services stagnated this year (46.6%). The corresponding absolute growth per sector came out for FY 2014/15 at 6.4% for the agriculture sector (a moderate increase from 5.4% last year linked with productivity gains and an improved Productive Safety Net Programme), 10.2% for services (a substantial decrease from 13% last year on account of reduced activity in the largely dominating whole sale and retail sector) and 21.6% for industry (a sizable increase but still essentially attributed to the construction sector which registered a 36.8% growth while manufacturing failed to pick up speed and growth remained around 16% for the third consecutive year).

The FY 2015/16 GDP growth of 11% forecasts by the GoE continues to look overoptimistic given constraints such as (i) limited growth of key trading partners (especially among emerging markets); (ii) underperforming export sector and uncertainty over the capacity of the private sector to respond to the GoE's call for more involvement (in a context of limited credit/forex availability and an overall unfavourable business climate); (iii) lack of reliable statistical data; and (iv) consequences of the recent failed rainy seasons.
Ethiopia's year-on-year annual inflation pursued its upward trend all through 2015 and reached its peak in September 2015 with an overall inflation rate of 11.9% up from 5.8% a year before. Overall inflation eventually stabilized around 10% in December with 12.1% for food inflation and 7.7% for non-food inflation.
Monetary Policy

For FY 2014/15, Ethiopia's monetary policy continued to be geared towards keeping inflation rate in single digits and maintaining control on exchange rates.

Ethiopia maintained a regime of managed-floating exchange rate as the National Bank of Ethiopia (NBE) pursued its policy of gradual depreciation. The nominal exchange rate reached 20.09 against USD in FY 2014/15 representing an annual depreciation of 5.4%. At the same time the Real Effective Exchange Rate continued to appreciate (21% year on year according to the IMF), since the USD appreciated again most currencies in 2015. This lack of competitiveness of the exchange rate remains a concern for the economy as it does not help improving export competitiveness in a context of export falling and deflationary trends on the trading partner's side.

External sector
Based on NBE data, the external sector displayed a 29.1% deterioration in the trade balance in FY 2014/15 still on account of increased imports for infrastructure and developmental projects coupled with export underperformance.
The concentration of export earnings remained important with coffee, oilseeds and gold representing 53% of all export earnings.
The availability of forex has been problematic all through 2015 for the private sector, as most reserves continued to be directed to finance imports of intermediate and capital goods for public investments (resources were also used to import food to drought affected areas). Private operators regularly complained over long delays for opening Letters of Credit for access to forex.
In FY 2014/15, overall agricultural production of cereals increased by 45% while yield/ha grew by 22%. However, crop yields in Ethiopia are still lingering at 55% of the world average.

The transition of subsistence oriented smallholder farmers into more market oriented production intensified although much remains to be done. Large-scale value addition and agro-industrialization have also been largely promoted by the GoE.

Due to the negative effects of El Niño, resulting in rainfall irregularities, the rural population requiring humanitarian assistance in 2016 reached 10.2 million people, showing the precarious nature of Ethiopia's smallholder agriculture.

Industrial Parks (IPs) are a prominent strategy of GTP II to overcome current bottlenecks and boost private investments. The planned job creation is targeted at 200,000 per year but reaching this target will entail overcoming the major challenge of the lack of high skill employees required to increase the employment share of the manufacturing sector.

The GoE established a dedicated Industrial Parks Development Corporation (IPDC) to promote and drive this strategy's implementation. IPDC prepared a national master plan aimed at the development of a total of 10 IPs (under domestic/foreign public investment funding worth 5 billion USD) which should become operational between 2016 and 2017.

The GoE has confirmed in the GTP II its very ambitious objectives for the road sector (to double the current road network of 100.000 km in 5 years, reaching 200.000 km by 2020). One of the most important projects finalized in the road sector in 2015 was the new expressway extension project linking the expressway Addis Ababa – Adama to Modjo and Hawassa, for a total of 203km.

The Addis Ababa's light railway was inaugurated in September 2015. The urban railway project was funded by China's Exim Bank (for a total amount of 475 million USD) and should contribute to solve the city's growing road transport problems.

Construction of the new electrified railway between Addis Ababa and Djibouti has not yet been completed but freight service was launched to enable the delivery of large quantities of wheat to areas affected by drought.
In December 2015, the GoE announced that the GERD was 55% complete and the diversion of the Blue Nile will begin.

In September 2015 Ethiopia and Djibouti signed an agreement for the construction of a 550 kilometre line to transport diesel, gasoline and jet fuel from Djibouti to Awash.

In July 2015, the Ethiopian Electric Power and the Reykjavik Geothermal company signed a Power Purchase Agreement for the first 500 MW of the Corbetti geothermal project, which was announced as a possible 1,000 MW project. Upon completion, it would be Africa's largest geothermal facility and likely the world largest.

Transport / Logistics
Ethiopian Airlines (EAL) performed remarkably in 2015, registering a profit of ETB 3.5 billion. EAL also continued to expand its fleet and opened 8 new international routes, confirming Addis Ababa's position as a hub for air transport in Africa.

The Ethiopian Shipping & Logistics Services Enterprise reached an agreement with ERCA to deliver shipments directly to the warehouses of large quantity importers who import full containers. This revived multimodal approach should reduce the cargo congestion at dry ports but remains subject to challenges such as low quality of services and poor handling of goods.

Ethiopia ranked poorly (130th out of 143 states) in the Global Information Technology report 2015. Increased competition in the sector should remain an important objective for the GoE.

Ethiopia was selected as 2015 top destination in the world for tourists by the European Council on Tourism and Trade. Tourism in Ethiopia generates around USD 3 billion of revenues yearly and employs around 1 million people. With GTP II, the GoE made the bold announcement that it intends to triple foreign visitors to more than 2.5 million by 2020, which, if achieved, will boost foreign exchange reserves.
Based on the latest Ernst & Young's Africa attractiveness report 2015, Africa became the world's second largest FDI destination in 2014 with USD 128 billion capital investment and Ethiopia registered an 88.2% increase in FDI projects, emerging as the 8th largest recipient of FDI projects in Africa. However, this trends need to be confirmed in 2015 and 2016. Poor performance in the 2016 Doing Business and Global Competitiveness Index might negatively impact investors' interest.

Overall, the major trends in Ethiopia's economy remain "largely favourable" as qualified by the IMF in its latest Article IV review, with (i) sustained growth (for more than a decade now); (ii) single digit inflation; (iii) tight monetary policy and prudent fiscal management; (iv) increasing FDIs and remittances; (v) rising domestic savings and capital formation; (vi) continued high levels of public investments in infrastructure; and (vii) a new industrial policy geared towards diversification and transformation of the economy.

Yet, downsides are still present and new ones are surfacing which may jeopardize the 2025 vision expressed by the GoE, such as (i) an over ambitious national planning based on unclear financing capacity and overoptimistic forecasts; (ii) the disappointing results of the manufacturing sector with a corresponding insufficient export revenue generation; (iii) strong impediments still limiting the development of the private sector; (iv) increasing shortage of foreign currency hampering economic activity; (v) limited access to financing for local private investment; (vi) an increasingly overvalued exchange rate impacting competitiveness of exports; (vii) a plunging current deficit and an increasing public debt (notably contracted by state owned enterprises); and (viii) a concentrated financial market still largely dominated by CBE.

Currency Devalution: Pros and Cons

Posted in Consultation

The euro was worth 6.94 birr in October 2000, and then peaked in April 2014 at 27 birr before falling to 21.93 in March 2015.During the fifteen-year period economic fundamentals were as follows:

Early 2000, Ethiopia’s external debt was unsustainable.  Debt forgiveness/rescheduling in 2000-2008 and 2010 – plus substantial external aid – have brought indebtedness to a manageable level.  In 2014, the debt to GDP ratio was a healthy 22.6% (est.), but is now increasing due to public sector investment expenditure.  External debt as a percentage of exports and primary income looks less healthy as export performance remains unsatisfactory.

If the inflation differential between Ethiopia and Euro zone turns out 8.5% in 2015, then the exchange rate recorded in Q1-2015 means a 25% real exchange rate appreciation of the BIRR against the Euro compared to 2014.  Unrealistic, considering Ethiopia’s CA deficit – even when corrected for FDI inflows – while the Euro zone CA may top €200 billion surplus in 2015. Finally, the forex reserves exceeded 3-month worth of imports in 2002-03; reserves are currently about 2 months only. Foreign currency shortage is a recurrent problem in Ethiopia explaining the existence of a parallel market and rationing of foreign exchange.  Of course, the issue of devaluation is sensitive because devaluation produces winners and losers. But, what devaluation seeks to achieve is a change in the relative price of exportable goods (vis-à-vis non-tradables) resulting hopefully in a boost of export performance, and, a disincentive to imports (thus a strategy of efficient import substitution). 


The choice of an exchange rate regime is important for competitiveness, macroeconomic stability and growth.  Exchange Rate regimes are classified as fixed exchange rate, fully floating market-determined exchange rate or intermediate regimes.  Ethiopian authorities describe their Exchange Rate regime as a managed float (= intermediate regime) with no predetermined path for the exchange rate. 

Before an auction system was established in 1992/93, the BIRR was pegged to the USD at 2.07 BIRR.  An inter-bank foreign exchange 

market was created in October 2001 with the National Bank of Ethiopia intervening.

Historically, depreciation pressures on the BIRR have prevailed. While the USD-BIRR rate stands around 20.5 in May 2015, the IMF (Oct. 2014) estimated the Real Effective Exchange Rate overvaluation in the range of 10-13%.  The “authorities acknowledge that a competitive exchange rate is important but consider too rapid adjustment to be counterproductive due to feedback effects on inflation”. 

Under Ethiopia’s regime:

  • Ethiopians and Residents of Ethiopia surrender, through a forex bureau, all foreign currencies in their possession against payment in BIRR.
  • Exporters are allowed to maintain a retention account to hold a specified amount of their export earnings for a defined period, with the remainder being surrendered by local banks to NBE. The percentage of authorized retention has fluctuated over time (and is determined by Directive; the rate was 10% (Directive 11/1998).
  • The NBE determines terms and conditions for transfer of foreign exchange and the exports or imports of goods (import permits).


The NBE aims to maintain sufficient international reserves to cover (a) payments for immediate and short term imports of commodities and services into Ethiopia, (b) foreign debt payment commitments.  When reserves decline, the Governor considers remedial measures and may suspend issuance of foreign exchange permits.

The bank carries out monetary management with a mix of policy instruments: sale/ purchase of securities issued by Government, a central bank credit facility to cover commercial banks’ short-term need, reserve requirements, setting floor deposit interest rate, use of credit control and moral suasion. 

The Monetary Policy Committee of the NBE reviews quarterly the economic developments and proposes a monetary policy stance to the 

Board of Directors in line with targets for inflation, growth rates of monetary aggregates, GDP growth rate, the real equilibrium exchange rate and the foreign exchange reserve.

The NBE is the biggest generator of foreign currency and enables it to intervene as the major market player, assuring exchange rate stability to some degree.

The dilemma of any policy decision maker is to achieve x targets with y instruments.  If the number of targets exceeds the number of instruments available, then meeting the targets would be a matter of pure coincidence.  Even if the number of Central Bank’s policy instruments exceeds the number of targets, it is not certain that the CB will be able to meet trend targets as it has limited or no influence on productivity growth, investments and external demand. Therefore, it may miss one or several targets.  The question is which ones shall be sacrificed?  


Economists focusing on economic fundamentals as drivers of exchange rate movements look at:

  • Price inflation differentials;
  • Current Account: surpluses (deficits) cause currency appreciation (depreciation).  The long-run equilibrium exchange rate comes with a sustained balanced Current Account.
  • Differentials in domestic/foreign money demand and nominal interest rate, between countries;
  • Stock of foreign debt relative to GNP (or to Exports).  A high ratio is considered a risk.  Potential investors require a risk premium above the normal nominal interest rates in order to make up for the expected future depreciation necessary to rebalance the Current Account deficit.
Pressure for devaluation comes from a deterioration of domestic competitiveness due to domestic inflation being higher than inflation in competitor countries, from the existence of unsustainable Current Account deficits and increase in foreign debt (affecting the creditworthiness), or other reasons (e.g. the structure of foreign debt). 

Speculative attacks do occur resulting in ER movements not in line with fundamentals.

From the observation of two experiences with devaluation (Franc CFA in 1994 and 1997 Asian financial crises) we have learnt that:

  • After devaluation, the Balance of Trade significantly improved in 8 countries out of 14.  It worked for the Asian economies.
  • Export volumes improved, after devaluation, in 7 out of 9 CFA countries.  By contrast, export performance deteriorated in all Asian economies, although the performance was still solid.
  • Growth in Import volumes actually increased in the 10 years following devaluation in 7 out of 9 CFA countries 9 studied.  In all Asian countries imports growth fell, as a result of lower domestic demand, explaining why currency devaluation in the Asian economies improved the Balance of Trade.
  • GDP growth visibly improved in all but one of the CFA countries, constituting a turnaround from negative growth experienced before devaluation.  By contrast, GDP growth in Indonesia, Korea, Thailand and Malaysia fell significantly from previous solid growth, though resuming in year-2.
  • The Investment rate (as % of GDP) improved in all but one of CFA countries studied.  Thus, devaluation is compatible with resource mobilization and GDP growth. By contrast, the investment rate fell in all five Asian economies studied, coming down from very high – unsustainable – rates in Korea, Thailand and Malaysia. 
Post-devaluation inflation is often used as an argument AGAINST. In Indonesia and Thailand, devaluation triggered double-digit inflation for 2 years.  However, fears for sustained inflation were exaggerated; the dynamics of the price spiral is not known beforehand but depends on country-specific circumstances. It is also 

true that domestic price increase erodes the initial positive impact on price competitiveness, but this is a process takes up to ten years in most cases.

The difficulty of CFA economies to maintain high economic growth under conditions of sustainability, following currency devaluation, is linked to a structural issue. For an economy to be able to increase export supply and to substitute for imports, its industry must be sufficiently diversified.  One expects the supply response to be stronger the larger the manufacturing base of the economy.  This was the case in Asia.  Ethiopia’s economy is notoriously undiversified.

In conclusion, currency realignment can work.  If the objective behind a devaluation strategy is to restore price competitiveness, then the devaluation basically BUYS YOU TIME to develop intrinsic competitiveness in your tradables sectors.  Competitiveness requires business upgrading to boost productivity, product/services innovation and market diversification.  These are processes which cannot be changed overnight.

EU consultation meeting: Strenghthening the role of private sector

Posted in Consultation

 At the consultation workshop on the topic of “Strengthening the Role of Private Sector in Achieving Inclusive & Sustainable Growth in Developing Countries”, the European Commission and Mr Roberto Ridolfi, Director, Directorate General for Development and Cooperation, EuropeAid, opened the debate on the role ofthe private sector in developing and emerging economies.
Since the last communication and strategy issued by the European Commission in 2003, the overall development context has substantially evolved, with several emerging economies showing how private sector development has been on the forefront of these countries' overall development agenda, including the achievement of the Millennium Development Goals (MDG).  
In view of issuing a new EU communication on how EU aid could best facilitate inclusive and sustainable growth through enhanced private sector development, Mr Ridolfi has been travelling to several countries to collect information and feedback from key stakeholders, such as companies, intermediary organisations, governments and diplomats operating locally in the business field. 
H.E. Ms. Chantal Hebberecht, Head of EU Delegation in Ethiopia, opened the workshop by reminding that Ethiopia is a very interesting case study on the matter: it is on track to meet most of the MDG even though the role of the private sector in that achievement would need to be further expanded. At the same time, the World Bank places Ethiopia in the bottom rating in its “Doing business” classification. 
The European Union supports efforts towards a stronger private sector and better investment and business climate. She mentioned the Transformation Triggering Facility, a EUR 10 million project for WTO accession and customs management modernisation or – for that matter- the BizClim financing of EUBFE’s activities. Overall, the European Union remains the most important trade partner of Ethiopia and the 2 largest foreign investor in Ethiopia.
As the new communication is being fine-tuned in April 2014, this workshop aimed at discussing the 10 key  issues concerning, such as: how to come to better targeted business environment reforms, how to increase the employment and poverty impact of private sector development support, what would be needed for stepping up the EU support to SMEs or access to finance. 
We would like to thank again the members of EUBFE who replied to our email and participated in this workshop and commented on the key issues. We hope this will help further strengthen EU support to the private sector in Ethiopia and elsewhere.

EUBFE Comments On New Customs Proclamation

Posted in Consultation

EUBFE-COMMENTS-ON-NEW-CUSTOMS-PROCLAMATIONA new Customs Proclamation has recently been drafted, aiming at replacing Customs Proclamation 622/2009. ERCA took the initiative to present the draft new legislation to foreign investors, by organizing a meeting in the EU Delegation on June 1st, 2012. Following the consultation meeting, the EUBFE prepared a detailed commentary paper on the draft law, putting together concerns and recommendations expressed by the EU business community and European Commission experts.

EUBFE’s Input To The Ministry Of Industry’s Study

Posted in Consultation

EUBFE-INPUT-TO-THE-MINISTRY-OF-INDUSTRY-STUDYAs part of the strengthened dialogue between the Governement and the private sector, a research team from the Ministry of Industry met with representatives of the EUBFE and the EU Delegation on December 3rd, 2012 to prepare a study on the medium and long-term strategy for Ethiopia’s industrial development. The European business community was asked to comment on Ethiopia’s attractiveness, challenges encountered by the private sector and how to make the country more FDI friendly.
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